REDUCING INCOME DISPARITIES AND POLARIZATION - The Canada We Want in 2020 Towards a strategic policy roadmap for the federal government - Maytree
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The Canada
We Want in 2020
Towards a strategic policy roadmap
for the federal government
NOVEMBER 2011
REDUCING INCOME DISPARITIES
AND POLARIZATION
The Canada We Want in 2020
Towards a strategic policy roadmap for the federal government
REDUCING INCOME
DISPARITIES AND
POLARIZATION
PREFACE AND INTRODUCTION
1
WHY CANADIANS SHOULD CARE
ABOUT INCOME INEQUALITY
7
Mark Cameron
INCOME
REDISTRIBUTION IN CANADA
14
Andrew Sharpe
INEQUALITY
IS NOT INEVITABLE
Sherri Torjman and Ken Battle
ABOUT CANADA 2020
Canada 2020 is a non-partisan, progressive centre
working to create an environment of social and economic
prosperity for Canada and all Canadians.
Join the conversation at www.canada2020.caPREFACE
MAKING
STRATEGIC
CHOICES
GOVERNING IS ABOUT making choices. challenges the country faces, and mobilizing
Sometimes the choices governments make consensus for action. In other words, we
are strategic, the product of hard thinking believe that the federal government can be a
to address major hurdles which coalesce at force for significant and positive change.
a particular point in time. It is our belief that This does not mean big government. It
Canada is at such a point in time today and it means intelligent, innovative, analytical and
is for this reason that we have produced this strategic government. It could conceivably
collection of papers to kick-start a discussion result in smaller government, focused on a
about the role of the federal government in few big and important areas of policy that
Canada. really matter to the country’s future.
A serious public policy strategy for the
country means doing less of some things, FIVE CHALLENGES FOR 2020
while focusing decisively and aggressively Today, Canada faces challenges and oppor-
on a few important things. This requires in- tunities that are quite unprecedented in
depth analysis of the really big challenges and our recent history, although they may seem
opportunities facing the country. It requires rather opaque to most Canadians. Our abil-
governments to be straight with Canadians ity to overcome these challenges – and seize
about the risks and rewards that lie ahead, so the opportunities – will determine the future
that citizens will buy into a clear direction set trajectory of Canada’s economy and society
by government. over the next generation. Our standard of
The orientation of this volume – indeed living and quality of life could well hang in
the basic orientation of Canada 2020: the balance. This is why we need federal
Canada’s Progressive Centre – is that the leadership.
federal government has a vitally important Canada 2020 contends that there are five
role to play in developing and implement- fundamental, inter-related challenges con-
ing strategic policies, focusing governments fronting the country which require strategic
and other institutions in society on the big political leadership and policy action from
the federal government.1 Increasing innovation and productivity successive federal governments have
Productivity growth and innovation are made incremental attempts to broaden
the sine qua non for economic prosper- and deepen Canada’s trade, investment
ity. Canada’s lack of productivity growth and economic relationships with Asian
has been a worrying feature of the econ- economies. Despite such efforts, Canada
omy for decades. Since 1984, relative is not really on the map in China and
productivity in Canada’s business sector India today, in stark contrast to many of
has fallen from more than 90% of the U.S. our major competitors.
level to 76% in 2007. There are no signs It is time for the federal government
of things improving: quite the opposite to take a much bolder, more creative
in fact. and aggressive approach to help deep-
Since the 1990s, the federal govern- en Canadian ties with Asia and enable
ment has been taking steps to try to Canadian businesses to take advantage
reverse this trend, primarily by investing of unprecedented market opportuni-
in university-based research and devel- ties in the region. We must leverage our
opment and by cutting personal income unique strengths and advantages and
and corporate taxes, the standard policy become an indispensible part of the new
remedies for dealing with flagging pro- Asian century.
ductivity performance. Yet Canada’s pro-
ductivity growth has actually become 3 Squaring the carbon circle Canada has
worse over the past decade. among the highest per capita levels of
It is therefore time for a much more greenhouse gas (GHG) emissions in the
aggressive, focused and creative federal world (although our total contribution to
policy response to Canada’s productivity global GHG emissions is low as a result of
growth and innovation challenge. Without the relatively small size of the Canadian
this, we risk falling further behind and los- economy). High Canadian emissions are
ing the revenues that enable us to sustain due in part to our unique geography and
our standard of living. harsh climate, but also to a weak culture
of conservation and inadequate policy
2 Rising to meet the Asia challenge The and regulatory regimes.
global centre of economic power is Modest measures to reduce emis-
inexorably shifting from the West to the sions have been implemented over the
East. This trend has been underway for past decade. But these initiatives have
twenty years, but it is now reaching a cre- been neither significant nor strategic; as
scendo, partly as a result of the fiscal and a result they have had little to no effect
economic problems plaguing Europe on Canada’s overall GHG emissions.
and the United States. There is no better Canada is also fast becoming one of
evidence of this shift in economic and the world’s leading fossil fuel producers
financial power than the recent efforts by and exporters. It has even been suggest-
the European Union to persuade China ed that Canada is “an energy superpow-
to help prop up the teetering European er”, or at least can realistically aspire
financial system. to that goal. With that title are likely to
Canada has been on a slow boat to come increased emissions, at least in the
China – indeed to Asia, more generally – absence of meaningful measures to com-
for many years, notwithstanding the fact bat these.
that we have some significant advan- As a G8 country, an original signatory
tages over other countries in this region to the Kyoto Protocol on climate change,
of the world. Over the past fifteen years, and one of the world’s largest per capitacarbon emitters, Canada has a moral Income polarization has not, up until
responsibility to make progress on limit- now, been a big issue on the federal agen-
ing GHG emissions (if for no other rea- da. Various reforms to federal income
son than to set an example for the big security programs and the tax-transfer
emitting countries). We are also at seri- system have been put in place over the
ous risk of missing opportunities in the past twenty years, but these have not
low-carbon economy of the future and been aimed at dealing with income polar-
of becoming increasingly marginalized ization. It is time for the federal govern-
economically if we fail to act. It is there- ment to analyze and consider the longer
fore time for a serious, strategic effort, term effects of income polarization, and
led by the federal government, to square to consider strategic policy reforms to
Canada’s carbon circle and put in place head off a looming problem.
policies that will significantly decrease
our GHG emissions. 5 Securing our health system for the future
Universal, high-quality healthcare has
4 Reducing income disparities and polar- been a defining feature of Canada and
ization Income inequality has been a Canadian citizenship for 40 years. It is the
creeping problem in Canada and other public service Canadians value most. Yet
advanced economies for many years now. the general consensus among experts is
The bottom two quintiles of the income that if we stick with the current funding/
scale have seen their market incomes administrative models and tax structure,
decline, in real terms, since the early Medicare as we know it is not financially
1980s (though transfers have resulted sustainable.
in some degree of after tax and transfer Healthcare costs have been rising sig-
growth). At the same time, the top nificantly as a fraction of our national
1% of economic families have accu- income and as a share of government
mulated an ever-increasing share of budgets (especially provincial budgets)
Canada’s wealth. for a generation now. The basic causes
Income inequality, a feature of all of healthcare inflation are well-known:
market economies, is now giving way to expensive new technologies, procedures
income polarization. While this phenom- and drugs that permit us to live longer,
enon is still more acute in the US than in coupled with an aging society.
Canada, some recent studies suggest the While healthcare delivery is a pro-
gap between rich and poor – and between vincial responsibility, healthcare financ-
the superrich and the middle class – is ing – paying for the system – has been
now growing faster in Canada than in a dual responsibility, shared by fed-
the US. eral and provincial governments, since
Income polarization can have serious- the beginning of Medicare. In 2004, in
ly perverse effects on the economy and on response to rising costs and pressures
society. At an extreme, it can undermine on provincial treasuries, the federal gov-
social cohesion, unravelling the fabric of a ernment announced a major increase in
country. The Occupy Wall Street protests, federal fiscal transfers to the provinces
and their analogue in other countries, for healthcare. With some $41 billion in
including Canada, are one early sign of transfers for health over ten years, the
the social discontent that can arise from 2004 Health Accord was billed “a fix for a
income polarization and a growing per- generation”. Unfortunately, it has proven
ception that the economy is not working to be little more than a stop-gap for a
for most people. decade.As we approach the end of the Health governments and politicians lack the ideas
Accord in three years’ time, innovative, to address these issues. Perhaps it is because
strategic policy approaches on health- of scepticism that the federal government
care financing are urgently required. can really make a difference. Perhaps we
We also need the federal government to have reached the limits of innovative public
provide leadership on the organizational policy and governance. Or perhaps we are
and accountability issues that underpin just avoiding the issues – in a collective state
our health system in Canada. of denial – in the hopes that they will resolve
themselves in an acceptable way through
The scope of federal government activity incremental policy action.
clearly extends well beyond these five issues. Whatever the cause, it is time for Canada
But our belief is that informed, strategic to break out of this mindset. Many elements
decision-making in these areas will go a long of Canadian society – the business com-
way towards securing the Canada We Want in munity, NGOs, governments at all levels,
2020. educational institutions, and Canadian
Our choice to address all the issues citizens generally – must work to address the
together has two implications. First, we will, challenges. No single entity has the solution.
as we move on, have an opportunity to exam- A collective effort is required.
ine the links between areas (for example, the Our goal is to kick-start a strategic policy
effect carbon policy will have on our trad- conversation throughout the country about
ing relations or the links between income The Canada We Want in (or by) 2020. Such a
inequality and productivity). Second, the conversation has not been evident to date in
broad scope of issues will give us a chance to Parliament, in general elections, in political
reflect more critically on the role of the state, party platforms, or in the media – indeed in
and the effectiveness of policy in general in any of the places you would usually expect
addressing the key issues of our time. to see it. The time for that conversation is
now. Perhaps it will lead to a consensus
KICK-STARTING THE CONVERSATION among political, business, academic and
This volume contains 15 papers, three in other leaders in Canadian society that the
each of the five areas identified above. We federal government needs to chart a strategic
have brought together a group of authors, all direction for the country to secure Canada’s
experts in their respective areas, and asked prosperity and the quality of life Canadians
them to approach the issues from a strategic have come to expect. We present this volume
policy standpoint. as a starting point.
For this is what has been missing. The
areas have all received attention in the past,
but often not in a truly strategic way. Perhaps
this lack of policy strategy and priority
attention is due to the fact the tipping point
has not yet been reached in any given area
(although it is looming large in some, notably
healthcare financing). Perhaps it is becauseINTRODUCTION
TO OUR PROJECT
THIS VOLUME MARKS the culmination of In Phase 2 of the project we will stimulate
Phase 1 of our project: The Canada We Want further conversations in each of our five
in 2020. chosen areas. We will host a series of panel
The overall aim of the project is to launch discussions and web-based exchanges that
a debate about the role of the federal govern- draw on the papers in this volume. These
ment in Canada. This publication is intended discussions will tease out areas of agreement
to act as a focus for discussion and a core and disagreement and begin to focus on
around which we can bring in ideas from implementation challenges. We expect to
a wider range of people. It is, in this sense, conclude this phase by mid 2012.
a starting point. Phase 3 will see us narrowing back down
Canada 2020 has called on fifteen authors and reaching conclusions. Drawing on the
to share their wide-ranging views in the materials from the previous phases, Canada
five areas. Sometimes they agree on policy 2020 will produce a final, consolidated
prescriptions, sometimes they disagree. But publication towards the end of 2012. This
what all authors have in common is a belief document will summarize our conclusions in
in the value of discussing the options and each of the five areas. It will take into account
thinking strategically about the issues that recent changes and lay out proposed future
Canada faces. strategies.THE CANADA WE WANT IN 2020
WHAT YOU CAN DO
Our aim is to draw as many viewpoints as possible into this project.
There are several ways you can get involved:
// Attend our series of panel discussions in 2012
// Check our website: download documents,
watch interviews and webcasts and make comments
// Contact us directly to arrange joint presentations
or discussions
Details are on our project site at: www.canada2020.ca
Diana Carney
Project Coordinator
diana@canada2020.caREDUCING INCOME
DISPARITIES AND
POLARIZATION
POVERTY REMAINS A SIGNIFICANT and grow- ing on services such as health and education:
ing problem in Canada. Income polarization Sharpe’s own research shows these to have
is also increasing steadily, to a degree that an important equalizing effect. Yet he would
could threaten social cohesion. Since tech- like to move beyond these. He believes that
nological advances and globalization both the federal government should capitalize on
tend to increase inequalities as returns to the current heightened public concern about
unskilled labour decline, this is a problem inequality – as evidenced by global protests –
that will not go away in the absence of signifi- and take this opportunity to enact bold new
cant policy action. It is also a problem, as our measures in favour of the less well-off.
contributors stress, that is shared with many
This is a problem that
other developed countries, though recent
increases in income inequality in Canada are
will not go away in the absence
towards the high end of the spectrum.
Of the papers in this section, only one –
of significant policy action
that by Andrew Sharpe – suggests a signifi-
cant rethink of the income support system
that has been in place, with little change, for
more than 20 years. Sharpe argues that our All authors are at pains to stress the criti-
system should be underpinned by an equal- cal role that government taxes and transfers
ity of opportunity agenda, in which greater play in mitigating inequality. The remaining
efforts are made to smooth out both financial two papers in this section argue that these
and human capital starting points. At pres- measures are – or could be – effective on their
ent, by contrast, we have a system that takes own. Thus, rather than moving beyond these,
unequal starting points as a given, focussing either in terms of rationale or actual mea-
instead on correcting the subsequent excess- sures, the federal government simply needs
es of market allocations. to increase the magnitude of the transfers it
A key change under such a system would makes and/or to extend the number of peo-
be the imposition of an inheritance tax. This ple who are eligible.
move would bring Canada in line with almost Sherri Torjman and Ken Battle are highly
all other developed countries. Sharpe does concerned with the dynamics of poverty and
not advocate abolishing the existing system inequality which, they assert, matters in its
of taxes and transfers. These would remain a own right, over and above its relationship
vital pillar, as would continued public spend- with poverty. Mark Cameron’s paper alsoTHE CANADA WE WANT IN 2020
Torjman and Battle’s preferred vehicle
Inequality matters
for increasing federal government support
to low and low-middle income Canadians
in its own right, over and above
is the Canada Child Tax Benefit (CCTB). Not
only is this already in place, but it is (almost)
its relationship with poverty
universal. They also discuss the Working
Income Tax Benefit (WITB) and call for this
to be extended further upwards (in income
notes the importance that we, as humans, terms). Cameron, on the other hand, favours
attribute to fairness. His paper makes the the WITB over the CCTB, though recognizes
case that even those on the right of the politi- the value of both. He also highlights the value
cal spectrum, who believe in smaller govern- of those institutions in our country that foster
ment and less intervention, should be ready “civic equality” (for example, the health sys-
to do more to counter inequality. This is part- tem and public schools) and cautions against
ly because in societies that begin to unravel piecemeal privatization of these which could
due to social tensions arising from inequal- dangerously undermine equality of access.
ity, increased government engagement is In short, though their starting points are
likely to be required. To head this off, and diverse, all the contributors call for the federal
to cater to our sense of fairness, the federal government to take deliberate steps to coun-
government should therefore pre-emptively ter soaring inequality and ensure that the
increase its redistributive efforts. Canada we want in 2020 is the Canada that
less advantaged groups might want too.
All authors are at pains to stress the
critical role that government taxes and transfers
play in mitigating inequalityWHY CANADIANS
SHOULD CARE ABOUT
INCOME INEQUALITY MARK CAMERON
Mark Cameron has over Income inequality in Canada has increased wealth and income at the top of the socio-
15 years’ experience working over the past two decades, although the economic ladder increases dramatically, as
in government, consulting and extent and effects of this widening inequality long as those at the middle or lower rungs
industry, with a focus on public have become most apparent in the past are benefiting at least to a modest extent?
policy. He has worked for several several years. The 2008 financial crisis, and Is relative inequality of income a problem
MPs and Ministers, and in the the recession which followed it, led to job if everybody’s lot is improving at least
Privy Council Office. He has and asset losses, especially among those in somewhat?
also worked as a consultant lower income groups. Many people became Yes, relative inequality does matter, for
on environmental and energy rapidly and abruptly aware of the precari- several reasons. Extreme income inequality,
policy. From 2006 – 2009 he ousness of their financial position. even where the least well off are still
served as Director of Policy Today, it is not only traditional voices making economic gains, can undermine
and Research and Senior Policy on the left that are expressing alarm about the sense of social cohesion necessary for
Advisor to the Prime Minister widening inequality: centrist and conser- a democratic society. Human nature is
of Canada. He later worked vative voices from business leaders to the acutely sensitive to relative fairness and
for Ontario Power Generation Conference Board of Canada have also positional status. We know from experi-
and recently joined Research joined the conversation. But with a majority ments in psychology and behavioural
In Motion as Director, Global Conservative federal government that is economics, such as the Ultimatum Game
Public Policy. Mark was educated pursuing an agenda of fiscal retrenchment, developed by Werner Güth and others,
at McGill University and the is income inequality an issue that could or that most people will reject an apparently
University of British Columbia. should be on the short- or medium-term “unfair” distribution of rewards, even if
federal agenda? I would argue that it is. rejecting it will make them personally
1
Güth, W., Schmittberger, It is worth asking, at the outset, why worse off. 1 Similarly, surveys show that
W. & Schwarze, R. (1982) governments should concern themselves most people would rather live in a society
“An Experimental Analysis with inequality at all. Obviously, a primary where they make $100,000 while everybody
of Ultimatum Bargaining”. objective for governments is securing eco- else makes $85,000 than one in which they
Journal of Economic Behavior nomic growth and ensuring that the whole make $110,000 while everybody else makes
and Organization 3 (4), of society benefits from such growth. $200,000, even when it is clearly explained
367–388. Theoretically, should it then matter if that they will have higher purchasing
1Changes in Gini coefficients from mid 1980s to mid-2000s
0.10
0.05
Australia
Ireland
France
Turkey
Greece
Spain
0.00
New Zealand
Finland
Portugal
United States
Norway
Germany
Italy
Sweden
Canada
Czech Republic
Mexico
OECD
Hungary
Japan
Austria
Belgium
Netherlands
Denmark
Luxembourg
United Kingdom
- 0.05
- 0.10
SOURCE: OECD (2008) Growing Unequal?: Income Distribution and Poverty in OECD Countries.
Figure 1
power, a larger house size, etc. in the second unity. It can delegitimize commerce and
scenario, as compared to the first.2 business and invite destructive protectionism
A society in which a small group is perceived and overregulation. Inequality, in short, is a con-
to be benefiting unfairly, or where there are wide servative issue too.”3
gaps between social and economic classes, can So, if there are ample philosophical and
lead to dissension, jealousy and anti-social practical grounds for both left and right to be
behavior, even if the less well-off are still making concerned about income inequality, what do
material gains. This, in turn, can lead to increas- we know about the state of income inequality
es in crime, loss of participation in social and in Canada and its underlying causes? And what
charitable organizations, and greater demands can we do to address this?
2
for government intervention to help deal with Choosing the right policy prescription Solnick, S. J. & Hemenway,
these social tensions. Such a scenario should requires an accurate diagnosis, so it is important D. (1998) “Is More Always
concern not only social democrats or liberals to understand what has caused increases to Better?: A Survey about
who see equality as an important social goal inequality in Canada and elsewhere. Only then Positional Concerns”.
in its own right, but also conservatives who are will we be able to identify measures that are like- Journal of Economic
concerned about maintaining public support ly to be successful in addressing it. Behavior and Organization,
for free markets and limited government. Inequality in market income has been grow- Vol. 37, 373-383.
As conservative commentator David ing in almost all advanced economies for the
3
Frum has written, “Equality in itself past several decades as a consequence of eco- Frum, D. (2008) “The
never can be or should be a conservative nomic globalization, technological change, Vanishing Republican
goal. But inequality taken to extremes can reduced progressivity in taxation, and the shift Voter”. New York Times
overwhelm conservative ideals of self- from an industrial to a service-based economy. Magazine, September 5,
reliance, limited government and national Increased integration of the global economy 2008.
2 THE CANADA WE WANT IN 2020Gini indexes using three measures
of adjusted income
0.50
0.45
0.40
0.35
0.30
0.25
76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Market income Total income After-tax income
SOURCE: Conference Board of Canada (2011) Canadian Income Equality.
http://www.conferenceboard.ca/hcp/hot-topics/canInequality.aspx
Figure 2
and rapid technological change have brought When looking at inequality data, it is import
greater rewards for highly-skilled workers and to note that inequality can be measured both
managers. Lower-skilled workers, by contrast, in terms of market incomes (before taxes
have been forced to compete with workers and transfers) and disposable incomes (after
in developing economies and have seen taxes and transfers). Focusing specifically on
far smaller gains. While domestic policy can cer- Canada, we see from Figure 2 that inequalities
tainly address tax and transfer issues which, in in market income grew rapidly in the 1990s, as
turn, affect final income distribution, it is very did inequality in disposable incomes to a lesser
difficult for any government to affect the broad- extent. Government policies have therefore
er shifts in the global economy that affect mar- had some effect in dampening the increase in
ket incomes. post-tax and transfer disposable incomes.
Figure 1 shows changes in Gini coefficients However, Figure 3 shows that while
(essentially the measure of what percentage of government policies became gradually more
income redistribution would be necessary to redistributive from about 1980 through the
eliminate all income inequality) in OECD coun- mid 1990s (so the difference between the Gini
tries between the mid-1980s and mid-2000s. coefficient for market income distribution
Income inequality has grown in the United and that for post tax and transfer income dis-
States and Canada more quickly than the OECD tribution grew larger), during the late 1990s
average, but most OECD countries have seen there was a considerable reduction in the level
inequality increase. of redistribution. Taxes and transfers have
3Difference between the Gini index
using adjusted market income and
adjusted after-tax income
- 0.06
- 0.08
- 0.10
- 0.12
- 0.14
- 0.16
76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
SOURCE: Conference Board of Canada (2011) Canadian Income Equality. Canadian Income Equality.
http://www.conferenceboard.ca/hcp/hot-topics/canInequality.aspx
Figure 3
reduced inequality, but the impact is now at least in the short term. But, as we have
smaller. This is likely the result of the reduc- already seen, governments are in a position
tion of federal transfer payments and the to address inequality in disposable income,
subsequent reduction in provincial welfare especially through the tax and transfer
programs (motivated by the desire for cost system.
savings, but also a philosophical choice in The current government has, in fact,
some provinces, as in the US, for welfare put in place modest measures that reduce
reform). Redistribution through tax and transfers income inequality. Since 2006, the basic per-
has leveled off since 2000 and both market sonal exemption has been increased, the
income and disposable income inequality have Universal Child Care Benefit (UCCB) and
remained relatively stable. Nonetheless, the Working Income Tax Benefit (WITB) have
trend to greater inequality remains clear. been brought in, and the Goods and Services
Tax (GST) was reduced – all measures that
WITH THE SITUATION BECOMING WORSE, benefited low-income households (even if
HOW SHOULD GOVERNMENTS RESPOND? many critics argued that the UCCB and GST
The broad international trend to increased cut should have been designed more progres-
inequality of market incomes in advanced sively). As a result of these measures, Statistics
economies is likely beyond the capacity of Canada data shows that even while the market
federal and provincial governments to address, income of households in the lowest income
4 THE CANADA WE WANT IN 2020quintile dropped between 2005 and 2009, brought in the Universal Child Care Benefit,
post tax and transfer disposable income for analogous to the old Family Allowance, and
this group grew, and their relative share of restored a per child tax deduction. Some social
disposable income remained constant. policy critics have argued that these measures,
The government should be encouraged which are not targeted to lower income house-
to continue in the directions it has set for holds, are regressive. However, restoring some
itself, remaining cognizant of the impact of form of universal recognition of the social value of
child-raising was an important – and politically
The government should popular – objective of the current government
which it will be loath to give up. But having
continue to enhance the Working restored a degree of universality to the child
benefit system, the government should ensure
Income Tax Benefit that future increases are targeted more towards
lower- and middle-income households
through the Canada Child Tax Benefit (CCTB)
tax and transfer changes on lower income and National Child Benefit Supplement.
groups. In particular, the government should While enhancing existing programs such as
continue to enhance the WITB. WITB and the CCTB are admittedly incremental
The WITB, which was implement- measures that will only have a modest impact
ed in 2007 and expanded in 2009, is one on income inequality, I believe this course of
of the most important poverty reduction action makes the most sense at the present
measures taken in recent years. It supple- time. As the government seeks to eliminate
ments the incomes of low earners and helps the large fiscal deficit run up in response to
remove disincentives to seeking paid work the recent recession – and with the recovery
instead of remaining on social assistance still slow and uncertain – it is unlikely that any
programs. As initially designed, however, WITB government would want to increase taxes
was brought in at such a low level that it excluded dramatically in order to fund greater benefit
many of the working poor. Enhancements increases. Instead, governments are more likely
brought in in Budget 2009 will ensure that to be persuaded to build on programs they
it will at least benefit anybody working have already initiated or enhanced, such as the
full-time at minimum wage. Over time, the WITB and the CCTB.
federal government should continue to extend Changes to taxes and benefits alone will not
be able to turn around a 30-year international
Governments should
trend towards income inequality in advanced
economies – although they can perhaps
seek to enhance civic equality
arrest the increase in inequality in disposable
incomes. But governments should also keep in
by emphasizing common
mind other means of ensuring social cohesion
by ensuring that people are treated as equals
institutions
and feel respected as equals, even if significant
income disparities exist. As the American writer
Mickey Kaus has argued, as economic dispari-
WITB further up the income ladder, and prov- ties become harder to overcome with conven-
inces should integrate their income support tional policy measures, governments should
programs with Ottawa to increase its impact. move from policies that simply try to achieve
The government should also continue to more equal distribution of income towards
enhance child benefits. The current government policies that seek to enhance civic equality by
5emphasizing common institutions where citi- represents an important component of social
zens meet as equals, regardless of income.4 equality. Just as extreme income equality can
In Canada, we are fortunate to have many undermine social cohesion, measures aimed at
of these public institutions – such as public improving civic engagement can help citizens
schools and a universal health care system. to interact as equals in key areas of public life
While many have proposed reforms to health- and social services.
care and education to reduce costs or improve As the economy recovers, the government
efficiency, policy makers should keep in mind should pursue a mix of strategies. It should
that these are institutions that help preserve increase benefits directed to the working poor
social cohesion and social equality, and market- and low income families, significant enough
oriented reforms to education and healthcare to ensure that the lowest income quintile
should be structured in ways that do not allow continues to increase its level of disposable
the better-off simply to buy superior services income in both absolute and relative terms,
or exempt themselves from these important while also undertaking measures to enhance
social institutions. civic equality by protecting important public
Governments can also pursue other means institutions and enhancing a common sense of
of promoting social cohesion and civic engage- citizenship. Through these measures Canada
ment, whether through voluntary or military can ensure that the broader global trends
service, or greater knowledge of and pride driving income inequalities do not under-
in Canadian history and culture. The current mine Canada’s social compact and the sense of
government has taken some steps in these civic equality that a free and democratic
areas. It should also keep in mind that pro- society requires.
moting the common values of citizenship
4
Kaus, M. (1992) The End
of Equality. New York: Basic
Books.
6 THE CANADA WE WANT IN 2020INCOME REDISTRIBUTION
IN CANADA ANDREW SHARPE
Andrew Sharpe is Most developed countries have experienced This has hugely boosted the income of the
Executive Director of the increased market income inequalities in top 1%, the income group that has been
Ottawa-based Centre for the recent decades. A large number of factors driving, almost single-handedly, the recent
Study of Living Standards, have been identified as contributing to this rise in inequality. Overly generous com-
a non-profit research development. The decline in unionization pensation practices in the financial sector
organization he founded in has meant that fewer workers enjoy the ben- have also contributed to the large increases
1995. Prior to this he was efits of collective bargaining, an equalizing in the incomes of top earners.
Head of Research at the force in income distribution. Governments At a household level, increased assor-
Canadian Labour Market and in many instances have failed to raise mini- tative mating, defined as the tendency for
Productivity Centre and Chief, mum wages in line with overall wage gains, persons with similar education and qualifi-
Business Sector Analysis, at disadvantaging the worst paid workers. cations to marry one another (a male doc-
the Department of Finance. He Deregulation has often hurt certain groups tor who in the past married a nurse now
is also founder and Editor of of workers such as truck drivers and air flight marries another doctor), has led to the rise
the International Productivity attendants, as has privatization of public ser- in the number of high income two-earner
Monitor and Executive vices. households.
Director of the International At the same time, skill-biased techno-
Association for Research logical change, related to the information THE IMPACT OF INCOME TRANSFERS AND
in Income and Wealth. technology revolution, has reduced the TAXES ON INEQUALITY IN CANADA
He received a PhD in overall demand for the services of the poor- The distribution of income in this country
economics from McGill ly educated, and globalization has meant is greatly affected by government policy.
University in 1982. that employers can now outsource produc- Statistics Canada produces estimates of
tion to low-cost countries. This decreases income distribution based on three differ-
the bargaining power of workers and so ent measures: (i) market income, defined as
reduces their incomes further. earnings plus net investment income and
At the other end of the spectrum, faulty private retirement income; (ii) total income,
corporate governance oversight procedures which includes transfer payments; and (iii)
have resulted in a massive rise in CEO com- after-tax income (which includes all taxes
pensation relative to the average worker. and transfers). It is the after-tax distribution
7Ratio of top to bottom quintile income in Canada,
adjusted for family size
Market income Total income After-tax income
1981 9.70 5.66 4.78
1989 10.26 5.60 4.57
2000 13.13 6.95 5.69
2009 14.28 7.06 5.64
Point change
1981–1989 0.6 -0.1 -0.2
1989–2000 2.9 1.3 1.1
1981–2000 4.6 1.4 0.9
1981–2009 1.1 0.1 0.0
Total Growth %
1981–2009 47.2 24.7 18.1
SOURCE: Statistics Canada (2011) Income in Canada 2009.
Figure 1
that is the most relevant from the perspective the highest quintile (2.9%). The final, after-tax
of private consumption, as it reflects the ratio between the top and bottom quintiles
1
inequality in access to marketed output. It was lower still at 5.64 to 1 or 40% of the A quintile is a portion of
does not, however, reflect access to public market income ratio. Figure 2 shows the a frequency distribution
services. Once this is factored in, we see a absolute figures for the various measures containing one-fifth of
slightly different picture, as I explain below. of income for the year 2009. the total sample. The top
In 2009, the ratio of the market income To track broad trends in income inequality, quintile represents the
of the top quintile to the bottom quintile the Gini coefficient is a well-accepted indica- average adjusted income
was 14.28 to 1.1 For every dollar of market tor. It reflects the dispersion of the income of the 20% of all economic
income earned by a person in the bottom distribution, and its value ranges from zero families who recorded the
quintile, a person in the top quintile to one. While a value of zero would indicate highest income; the bottom
received $14.28 (Figure 1). Income trans- that income is equally divided among quintile is the same for those
fers greatly boosted the total income of Canadians, a value of one would mean that with the lowest income. The
those in the bottom quintile and reduced a single household receives all the income quintile distribution takes
the top/bottom income ratio by one half in the economy. Therefore, when income into account only economic
to 7.06 to 1. This is the result of the high inequality increases, the Gini coefficient goes families (not unattached
government transfer rate for the lowest up and vice versa. individuals) and is adjusted
quintile (amounting to 52.0% of adjusted The Gini coefficient tells the same story for changes in family size
total income of this quintile) compared to about the impact of transfers and taxes over time.
8 THE CANADA WE WANT IN 2020Adjusted income by quintile
for economic families, 2009
$120,000
105,900
$100,000
102,800
$80,000
82,900
$60,000
57,600
52,800
48,800
$40,000
41,600
36,800
15,000
35,800
14,700
28,400
26,500
7,200
$20,000
20,900
0
Bottom quintile Second quintile Third quintile Fourth quintile Top quintile
Market income Total income After-tax income
SOURCE: Statistics Canada (2011) Income in Canada 2009.
Figure 2
on income inequality. In 2009, the Gini quintiles grew by around 18%, the income
coefficient for market income was 0.515. of the middle quintiles grew by around 25%,
When income transfers were included, it but the incomes of the top quintile grew
dropped by 16.5% (0.085 points) to 0.430. by close to 40%.
With taxes factored in, it was an additional Figure 1 shows the extent to which taxes
0.036 points lower at 0.394, a further 7.0% and transfers have reduced market income
decline. Income inequality as expressed inequality over the period 1981 to 2009.
by the after-tax Gini coefficient was thus In 1981 the low to high quintile ratio of
roughly three quarters (76.5%) of the level income after taxes and transfers was 4.78,
of inequality for market income. or about half what it would have been for
market income (9.7). By 2009 these figures
HOW HAVE REDISTRIBUTIVE had switched to 5.64 (after taxes and trans-
MEASURES CHANGED OVER TIME? fers) and 14.28 (market). In simple terms,
Between 1981 and 2009 inequality in Canada then, after-tax income inequality rose by
grew, according to both measures (top to 18.1% over this period while market income
bottom quintile ratio and the Gini coefficient). inequality rose by 47.2%. Redistribution
Figure 3 shows that the real market incomes measures had more of an effect on the lowest
of the bottom two quintiles actually fell over quintile in 2009 than they did in 1981. But
this period, while that of the top quintile rose such measures were not strong enough
by 43.2%. When taxes and transfers are taken fully to offset the sharp increase in market
into account the incomes of both the bottom inequality that took place over this period.
9Percentage change in income
for economic families 1981 – 2009
50 %
43.9
43.2
40 %
38.9
30 %
25.4
23.9
23.1
20 %
19.5
19.2
17.8
17.6
15.4
12.3
10 %
11.5
-2.7
-3.2
0%
-10 %
Bottom quintile Second quintile Third quintile Fourth quintile Top quintile
Market income Total income After-tax income
SOURCE: Statistics Canada (2011) Income in Canada 2009.
Figure 3
Gini coefficients for the time tell a similar to 9.9% between 1982 and 2007. This means
tale. Canada was a more unequal society in that 1% of Canadian households command
2
terms of income distribution in 2009 than nearly 10% of our total income, a trend Heisz (2007) reached a
it was in 1981, but it would have been far towards income polarization that is at once similar conclusion for the
more unequal without the greater redistrib- alarming and very public. Such accu- 1981 – 2004 period. While
utive role of the state.2 Nonetheless, there mulation at the top has almost certainly governments are now doing
was still a significant increase in after-tax contributed to the perception that overall more on the redistributive
income inequality in this country over the inequality has risen more than is in fact front relative to 1981 – as
period: government could have done, and the case. This is something that needs gauged by their impact on
could be doing, more to offset rising mar- to be accorded special attention in the after-tax income relative to
ket inequalities. development of future federal government market income – an OECD
As noted, the top 1% of earners have redistributive policies. study found that the extent
accumulated massive sums in recent years. of this redistribution effort
The market income share of the top 1% A BROADER APPROACH has diminished since 1994
of super-rich households increased 5.9 TO REDISTRIBUTION (OECD, 2008). This decline
percentage points from 7.7% in 1982 to Discussions of redistribution are generally has been largely driven
13.8% in 2007, accounting for the entire framed in terms of government taxes and by the declining role of
increased income share for the top quintile transfer payments and the effect of these on transfers such as welfare
as a whole.3 The after-tax income share of various income groups. But the issues are payments and employment
the top 1% increased 3.4 points from 6.5% much broader. The discussion can be extended insurance.
10 THE CANADA WE WANT IN 2020to include government spending on public top four income quintiles, and was much
goods, such as education and health, and weaker in the bottom quintile, largely due
how this is distributed between groups. It to differential rates of enrollment in post-
can also take in other breakdowns of the secondary education.
population such as by age group, educational This broader approach to redistribution
attainment level, and region. highlights the important redistributive role
played by government spending on goods
Erosion of public and services such as health and education.
Public services are therefore an essential
services will tend to element of the redistributive effort of gov-
ernment. Erosion of public services will thus
increase inequality tend to increase inequality, something that
is not often at the forefront of discussion
when cuts are proposed.
The Centre for the Study of Living Another interesting fact that comes
Standards (CSLS) has recently released a to light when taking a broader view of
report that provides such a broader analysis of distribution issues is that the largest
the net redistributive effects of government redistribution in Canada, in terms of net
taxation and total spending.4 It found that government expenditure, actually takes
in 2005, the latest year for which data are place across generations, not income
available, net government expenditures groups. In 2005, households headed by
in Canada were $2,557 (2000 US dollars) a person 65 or over received, on aver-
per household, consisting of $11,653 in age, net government spending of $24,091,
government transfers i.e. income support compared to $-2,452 for households with a
programs, $9,306 in public consumption (e.g. head aged below 65. This situation reflects
education, health), and -$18,401 in taxes. A the Old Age Security and Guaranteed
household in the bottom income quintile Income Supplement payments made to
received $4,245 in net government expendi- seniors, the higher healthcare expenditures
ture, in the second lowest quintile $6,065, in for this group, and the lower taxes paid,
the middle quintile $7,588, in fourth quintile reflecting lower income.
$4,707, and in the top quintile -$9,821. This generational redistribution is a
3
Veall, M. (2010) “Top It is notable that it is the middle quintile, normal part of the implicit contract
Income Shares in Canada: not the bottom quintile, that benefits the between the state and the population,
Updates and Extension”. most from net government spending and whereby persons pay taxes during their
Working Paper Department that it is the top quintile that benefits the working lives and then receive significant
of Economics, McMaster least (largely because of the higher taxes income support and health benefits during
University. paid by households in this quintile). the latter part of their lives. However, this
(http://worthwhile.typepad. Different types of government expenditure aspect of overall redistribution can easily
com/veall.pdf) programs have different redistributive be forgotten. There is a tendency for people
impacts. For example, absolute spending on to believe that most of the contributions
4
Sharpe, A., Murray, A., healthcare was found to be similar across they are paying to redistributive efforts
Evans, B. & Hazell, E. (2011) income groups, implying an equalizing favour the poorest income groups, when
“The Levy Institute Measure effect on the overall income distribution, in fact they mostly favour the old (there is
of Economic Well-being: given that this spending represents a much of course some overlap between these
Estimates for Canada, 2000 greater share of the broadly-defined income two groups).
and 2005”. CSLS Research of the poor than of the rich. In contrast,
Report 2011-09. education spending was concentrated in the
11POLICY RESPONSES // Intergenerational inequality
Fundamental changes have occurred in Unlike most other developed coun-
the Canadian labour market, and in society tries, including the United States,
in general, in recent decades due to global- Canada does not have an inheritance
ization and technological change. During tax in place. The introduction of such
this time, redistribution policies have played a tax could contribute significantly to
a key role in reducing income inequality in greater equality of opportunity in this
Canada. However, the tax/transfer system country and should have a moderating
should do still more to ensure that the after-tax effect on market income inequalities
distribution of income in this country down the line. Critical implementation
remains within a socially acceptable range. issues include the income threshold
The system must evolve to keep up with at which the tax kicks in (people with
the changing economic environment. In a relatively modest estates should not
recent paper Robin Boadway from Queen’s be affected) and how to minimize tax
University has cogently argued that the avoidance possibilities for the rich.
redistributive role of the tax/transfer system
in Canada is inadequate and needs rethink- // Post-secondary education
ing.5 He points out that the rate structure of There are a number of market fail-
the tax system as a whole has considerably ures associated with post-secondary
flattened, especially at the provincial level, education. Education is a particularly
and that transfers to the least advantaged, risky form of investment: low income
such as those on welfare, have worsened individuals are subject to liquidity
significantly over the last 30 years. In his view, constraints because of the difficulty of
an equitable tax transfer system should borrowing against future human capi-
redistribute so as to compensate for the (dis) tal, and persons from disadvantaged
advantages with which people are endowed backgrounds are poorly prepared to suc-
“through the luck of birth” (page 176). ceed. Government policies are needed
Boadway argues for an equality of to address these market failures. This
opportunity agenda. This would be a sig- would, in turn, help reduce inequality as
nificant modification of the system that we more people from lower quintiles would
currently have in place, which is largely be able to access the type of educa-
focused on outcomes and smoothing tion that enables them to move up the
the excesses of market allocations, with income ladder. Potential policies in
relatively little regard for starting points. this areas include greater sheltering of
Boadway focuses particularly on inter- investment in human capital through
generational inequality and access to post- the tax system (for example, a wider
secondary education. range of deductions for expenditures
linked to education), a fully-funded
5
income-contingent student loan system, Boadway, R. (2011)
and more grants to students from low “Rethinking Tax-Transfer
income families. Policy for 21st Century
Canada” in Gorbet, F.
& Sharpe, A. (eds.) New
Directions for Intelligent
Government in Canada:
Papers in Honour of Ian
Stewart. Ottawa: CSLS.
12 THE CANADA WE WANT IN 2020A reasonable degree of equality is widely expanded and the contribution that the rich
regarded as a key societal goal. Given make to achieving greater equality of out-
the inherent tendencies of the market to comes should be increased. Public services
generate inequality, it is important that that benefit all citizens, such as public transit,
government intervene through redistribu- should be further developed. Measures that
tive policies to offset market forces and promote equality of opportunity, such as
ensure that income inequalities remain inheritance taxes and better access to post-
within socially acceptable limits. These secondary education for the poor, should
policies take three forms. First, tax/transfer also be implemented.
policies drive a wedge between market and The Occupy Wall Street movement
post-tax income shares. Second, government has focused the attention of the world on
spending on public goods and public growing inequality. Many political leaders,
services such as education and health is including the Governor of the Bank of
profoundly equalizing (something that Canada and the Minister of Finance, have
needs to be clearly recognized as we plan for expressed sympathy with the issues identi-
the future of such services). Third, equality fied by this movement. This situation provides
of opportunity can temper the growth of an historic opportunity for Canadians
market inequalities in the first place. to rethink our approach to addressing
The way forward for Canada to become inequality. A national debate on how gov-
a more equal society must include all three ernments in Canada can most effectively
policy approaches. Programs that are effective redistribute income to prevent growing
in assisting disadvantaged groups should be inequalities is urgently needed.
REFERENCES
Heisz, A. (2007) “Income Inequality and Redistribution in Canada: 1976 to 2004”.
Statistics Canada Analytical Studies Research Paper 298.
OECD (2008) Growing Unequal: Income Distribution and Poverty in OECD Countries.
Paris: OECD.
Sharpe, A. & Ross, C. (2011) “The Living Standards Domain of the Canadian Index of
Well-being: An Update”. CSLS Research Report 2011-15.
13INEQUALITY
IS NOT INEVITABLE
SHERRI TORJMAN AND KEN BATTLE
Here’s the bottom line: the kids and paying the rent, in the trenchant Sherri Torjman is Vice-
// Poverty and inequality matter. words of Mel Hurtig.2 President of the Caledon
// Governments play a vital role At last count, in 2009, close to 3.2 million – Institute of Social Policy. She
in tackling poverty and inequality. one in 10 Canadians – lived on a low income. has written in the areas of
// The federal government holds the key This national average masks the fact that welfare reform, customized
levers, which are already in place. certain groups (including aboriginal people, training, disability income and
recent immigrants and persons with dis- supports, the social dimension
POVERTY MATTERS abilities) face an even greater risk of poverty. of sustainable development
Canada has established a reputation Not surprisingly, the poverty rate rises and and community-based poverty
throughout the world as a peace-loving and falls with the economic tides, as illustrated reduction. In 2006 she authored
stable nation. Inside our borders, an equally by Figure 1, which shows the close corre- the book Shared Space: The
bright image emerges. A recent survey by spondence between the low income and Communities Agenda. She has
the Centre for the Study of Living Standards unemployment rates. advised the government on
(CSLS) found that most Canadians consider The undulating ups and downs of the tax measures for people with
themselves happy – or very happy – with poverty waves are enough to make you sick; at disabilities as well as on childcare
their lot in life.1 On July 1 this year, Maclean’s least that is the conclusion of a burgeoning and disabilities more generally.
released an article on why it is a great time to body of international evidence. Of all the In 2010 Sherri was a recipient
be living in Canada. hazards of life below the poverty line, none of the Top 25 Canadians Award
Unfortunately, all this sunshine fails to so dramatically separates low-income from the Canadian Association
cast light on a serious problem lurking just Canadians from the rest of society as the of Retired Persons.
below the sparkling surface. health gap. People living on low incomes
Far too many Canadians do not count have a shorter average lifespan and run a
1
themselves among the happy campers. These greater risk of illness and disability than CSLS (2011) “Happiness
are the families that live in poverty. These are those with more money. as a Goal for Public Policy:
the households that spend higher than aver- The struggle to live on an inadequate Ready for Primetime?”
age proportions of their income on food, income increases the scope, frequency and CSLS Research Note 2011-1.
clothing and shelter. Every day is a struggle severity of stress for families, thereby raising (http://www.csls.ca/notes/
just to get by. They choose between feeding parents’ and children’s susceptibility to a Note2011-1.pdf)
14 THE CANADA WE WANT IN 2020Low income rate and
unemployment rate, 1976 – 2009
16 %
14 %
12 %
10 %
8%
6%
4%
2%
0%
76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
SOURCE: Statistics Canada Low income rate Unemployment rate
Ken Battle is President of the Figure 1
Caledon Institute of Social Policy. wide range of physical, psychological and study in Britain put its price tag at an annual
Before founding Caledon in 1992, social problems. The relationship between £25 billion or 2% of GDP. Here at home,
he was Director of the National income level and all these types of risk is federal and provincial governments across
Council of Welfare, a citizens’ typically strong and inverse. Canada lose between $8.6 billion and
advisory body to the Minister The effects of poverty are felt very early in $13 billion in income tax revenue to poverty
of National Health and Welfare. life. The odds of never seeing a first birthday every year.3
Ken was educated at Queen’s are worse for low-income babies in general
University and the University and aboriginal infants in particular. Low INEQUALITY IS DIFFERENT
of Oxford, and has taught at birth weight is an important predictive indi- FROM POVERTY: IT MATTERS TOO
both Queen’s and Carleton. He cator of troubled childhood development Poverty is not, however, the only concern. It
has advised the federal govern- and poor adult health. is closely linked to – but remains separate and
ment on key issues of social But poor means more than just poor distinct from – the related problem of inequality:
policy. Ken was awarded the health. Poverty is a serious and stubborn the gap in the average incomes of rich and
Order of Canada in 2000 and the problem, imposing heavy social, economic poor households. Over the past quarter-
Saskatchewan Distinguished and personal costs that affect all Canadians. century, earnings of the wealthy in Canada
Service Award in 2004. Low incomes lead to lost opportunities for grew by 16% while those of the poor actually
individuals, the economy and society. The dropped by 21%. The only positive note in this
2
Hurtig, M. (2000) Pay the Rent persistence of low incomes means that story is that inequality would be much worse
or Feed the Kids? Toronto: governments are called on for higher social in the absence of government measures in the
McClelland & Stewart. spending while the tax revenue that is needed form of redistributive social programs, and
to fund the very programs that are aimed progressive taxes and benefits.
3
All these studies are cited at preventing and reducing low income The numbers tell a powerful story. An
in Ontario Association of is foregone. exhaustive body of evidence from around
Food Banks (2008) The Cost A US report estimated that child poverty the world shows the wide-ranging negative
of Poverty: An Analysis of the in that country costs $500 billion a year – or impact of extreme inequality.
Economic Cost of Poverty in 4% of GDP – in increased crime, reduced Research on health inequalities and the
Ontario (see pages 7 and 17). productivity and poor health. A similar social determinants of health has found that
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